Energy Savings Performance Contracts (ESPCs)

An ESPC is a way to finance the cost of making improvements to a home or business or public building that would save energy. The mechanism is to use the money that comes from lower utility bills to pay back an energy services company who pays the upfront costs of making the energy efficiency or renewable energy improvements. The improvements could include updated energy equipment, improved windows, efficient lighting, a better boiler, sometimes a renewable energy system. The owner pays the equivalent of today’s utility bills for several (5-20) years to the energy services company to pay them back, and then pays lower utility bills through the rest of the lifetime of the improvements. The advantage to the owner is that the owner gets the reliability, comfort, and bragging rights about the new improvements right from the start, and he/she then gets financial benefits of lower monthly payments for utility bills after the contract time is over and for the life of the improvements.

Because the whole concept is based on energy savings, there has to be a current base case for the energy services company to come in and improve upon. The first step is to select an energy services company (ESCO) and have them do a very in-depth energy audit to identify the most cost effective opportunities for replacements, new technologies, etc. Then the owner and the energy services company negotiate the contract. Here are a few links are to a couple representative (no endorsement intended) commercial firms, a trade association, and a couple states. (There are also many links to how ESPCs are used for federal facilities, not included here.)

While ESPCs are most commonly used for improvements to existing buildings, they can be used for new construction as well. The following description was provided by Jeff Dominick of the National Renewable Energy Lab, and discusses how ESPCs are being used for new construction at federal government facilities by federal agencies. The principle process would be the same for any building owner.

“An ESPC can be used to incrementally improve the efficiency of planned and funded building construction projects without using capital appropriations to reimburse the ESCO.

First, the agency, ESCO, and architect (perhaps with the general contractor, if selected) meet and form a consensus about the baseline (non-improved) building design and energy use. At a minimum, the baseline building must meet existing energy codes and standards.

Then the ESCO “audits” the baseline design, perhaps through simulation in conjunction with review of any baseline equipment and building material selections. The ESCO suggests more energy efficient materials and systems (windows, insulation, chillers, boilers, air handling equipment, etc.), and the incremental costs and savings are presented.

All parties (ESCO and agency at a minimum) then negotiate and come to agreement on the incremental costs and savings, and confirm that the savings will pay for the incremental costs over a reasonable contract term. The new, more efficient equipment and materials become part of the building design, and their costs are allocated to the ESCO and the general contractor (GC).

The costs are allocated by comparing the total incremental cost increases to the costs of building systems and materials, and several items are identified for the ESCO (rather than the GC) to purchase and install. In this way, the ESCO might buy a complete chiller and several air-handling units, while the GC purchases more efficient windows and wall insulation. Although the building now costs more to construct than the inefficient building, the value of the GC’s contract does not go up since some costs are borne by the ESCO. The ESCO coordinates the installation of its equipment with the GC in much the same manner as a GC subcontractor.

This process allows each party to buy complete systems, since one can’t typically buy an incremental improvement (lower kW/ton for example) separate from the system (chiller, etc.). The ESCO uses its own funds to buy its systems, and is not paid any capital dollars.

Once the building is constructed and accepted, the ESCO is paid from the incremental savings of all energy efficiency upgrades to the baseline design. Extending the previous example, the ESCO would be paid for the incremental savings generated by the chiller, air-handling units, windows, and wall insulation. Although the ESCO did not purchase all those systems, it invested the equivalent money in the systems it purchased and installed. The ESCO is responsible for the performance (and usually the M&V) of all the systems and materials from which it derives payments. The building owner takes title to the ESCO-purchased equipment at the end of the ESPC term.”